An Investigation of leading and price discovery in OPEC spot and West Texas Intermediate oil futures markets

In this study, the relationship between futures and spot markets is investigated for two different types of benchmark oil, West Texas Intermediate (WTI) and OPEC, using monthly data from January 2003 to November 2014. For this purpose, a vector Autoregression model, Johansen test, vector error correction model and Granger causality test is applied. The Johansen test results indicated a long run relationship between OPEC spot and WTI oil futures prices. According to Granger causality test,although there was no short run causality between OPEC spot and WTI oil futures markets, a bidirectional long run causality is found between these markets. The vector error correction model supported the dominant role of WTI oil futures market in leading and price discovery. Results from the impulse response functions showed a positive and transient dynamic effect of spot price’s shock on futures prices, while the spot prices have negative and persistent response following a shock on futures prices. Based on variance decomposition procedure, the most influential variable in explaining OPEC spot price variations, is the OPEC spot price variable and then US oil inventories.